Goldfinger et al, analysis should always be based on the best available evidence and not speculation. I have researched some evidence, gathered from military and Treasury officials, that the gold is where the government says it is. I have seen no evidence whatsoever that it is not. Based on this, I assume the gold is there. If I learn differently someday, I'll change my view, but until then I'll base my economic and monetary analyses on the fact that the United States is the proud owner of 8,133 metric tons. But what about the audit? What harm can there be in that if the gold is where the Treasury says it is? There are two powerful reasons not to do the audit even if the gold is in the vaults. The first has to do with the credibility of gold as a component of international reserves and monetary systems in general. Gold was officially demonetized by the International Monetary Fund in 1973 not long after President Nixon ended the convertibility of dollars into gold in 1971. Since then gold has been continually disparaged as a monetary asset, most recently in the remarks of Ben Bernanke that the possession of gold by the United States was a mere "tradition." If that were so, why would the United States audit something so unimportant? An audit suggests that gold is somehow meaningful and deserving of respect. The official position is that gold is a legacy asset of no particular importance. In this context, refusing an audit makes sense. An audit would give gold too much credit and start to erode the official propaganda that gold is not a monetary asset. After all, no one audits the number of shells on a beach—they are too unimportant. Another reason has to do with not calling attention to a host of ancillary questions. Assume the audit were conducted and everything was in good order, that the United States had the right number of ingots of 99.99 percent purity and everything was numbered and in its place. This would immediately lead to other questions. Is the gold leased? To whom? On what terms? Some naively assume that if the gold is leased to commercial banks such as J.P. Morgan that the leasing bank backs up a truck and takes it away. That is not true. The gold can be leased in paper transactions without ever leaving Ft. Knox or West Point. The leased gold can then be rehypothecated by J.P. Morgan to other banks and so on until multiple parties all claim some title to the same physical gold. That gold goes on to support an even larger inverted pyramid of "paper gold" transactions in futures, options, forwards, swaps, and so-called unallocated storage. One reason not to do an audit is to avoid all of the awkward legal title questions that would arise once the physical existence issue was settled. The Treasury would rather ignore gold than open Pandora's Box. Gold remains the 8,000 ton gorilla in the room; the thing that is too big to ignore but that no one wants to discuss. The international monetary system and the role of the dollar are in dire straits even if all of the gold is where it is supposed to be. It is not necessary to fantasize about phantom gold in order to see that a monetary crisis is imminent. The Fed and Treasury refusal to audit gold is part of their painstaking effort to deny that gold is still at the heart of the system. No more elaborate explanation is required.
BDR Price at posting:
51.0¢ Sentiment: None Disclosure: Held
